Once again, the only chart that matters in the world is the Italian 10-year, which hit a new record yield today of 6.656%. You can round that to 6.66% if you’d like.
The question is: When will the ECB put an end to this.
Day in and day out, the ECB nibbles on Italian bonds, spending more euros, with nothing to show for it.
If the ECB is going to do anything worthwhile, it can’t buy in size, it just has to set a price, and say: Here, we’re not going to let Italian yields to above X.XX%.
Edward Harrison has a great post predicting an outcome exactly like this:
(I) wrote in conjunction with Friday’s video clip from RT “how I would provide the backstop”. The ECB would ‘guarantee’ a rate for Italian bonds that is high enough to be a penalty spread to Bunds – liquidity at a penalty rate – say 200 bps to German Bunds, which would be 3.8% on 10-year money. The ECB would not necessarily have to buy any BTPs to defend its target. The private sector “would do it” for the ECB via the language and confidence in the “guarantee”. That’s how it works at the short end of the curve with the policy rate by the way and it is also exactly what the Fed did during the 1940s and 1950s; so we know ‘financial repression’ works. After an initial foray in the market to prove the credibility of the backstop and to ‘punish’ speculators, every speculator would blanch at going up against the ECB’s wall of liquidity for fear of insolvency. I added the part about speculators because that’s how policy makers in Europe think about this crisis.
This is what the Swiss National Bank did ultimately. For a long time it just nibbled, bidding up Euros in an attempt to keep the Franc somewhat cheap.
Eventually it just set a euro floor and put an end to the situation.
The question is: When?